Is bitcoin money?
Crypto has been in the news a lot lately with lots of bankruptcies, arrests, criminal trials, SEC actions and perhaps there may soon be an ETF for bitcoin trading. Oddly (to me), the price of Bitcoin continues to rise and is above $40,000 as I write this.
It brings up a question I’ve been asked and I’ll answer here in this updated archival post:
Is bitcoin well-suited to be a substitute for a traditional currency such as US dollars or Euros?
In brief, it’s useful for illicit transactions such as ransomware, money laundering, and drug transactions, but for the day-to-day prosaic uses of money, our current system of cash, checks, credit and debit cards works much better and will not be displaced anytime soon.
A successful and broadly accepted currency performs three core functions:
1. Medium of exchange
This allows an economy to move beyond barter and enables unrelated parties to transact even if they’re not interested in trading for what each other has. When you have something I want but I don’t have anything you want in return, barter fails but money smoothly enables that transaction and everyone benefits.
Can bitcoin serve as a medium of exchange? Maybe, but our current payment methods are easier, cheaper, and faster. Everyone’s favorite example was a bitcoin conference in 2018 that wouldn’t accept payment in bitcoin because it was too slow and expensive to process the payments. That’s funny.
2. Unit of account
This allows us to value goods and services. Your groceries, rent, and salary are quoted in dollars, rather than bitcoin, ounces of gold, or seashells. Even when Tesla announced that they would take payment in bitcoin, their cars were still priced in dollars.
Can bitcoin serve as a unit of account? Not if you want the value to be stable. Bitcoin is ill-suited for this given how much its value fluctuates each day. It’s highly unlikely you’ll see prices quoted in bitcoin, rather than dollars, in the foreseeable future.
3. Store of value
This allows us to save assets with little fear of their value being depreciated over time. Historically, precious metals, land, and real estate have played this role but a stable currency is a more effective store of value than either a vault full of shiny metal or a triple decker in Boston.
Can bitcoin serve as a store of value? Not if you want its value to be stable and secure. It’s hard to imagine rational people putting their life savings into bitcoin and sleeping comfortably each night. Compare that to hundred dollar bills, US Treasury securities, or an FDIC-insured bank account — they’re not sexy but they’re safe.
Bitcoin is a fascinating cultural phenomenon but it’s not going to crowd out traditional currencies anytime soon. It may be a brilliant technical idea but it’s still in search of a use case. Right now, it’s best for ransomware payments but for all other traditional functions of money, our current system works better. And, if you can’t even pay for a bitcoin conference in bitcoin, then what use does it really have?
You may have heard that El Salvador adopted bitcoin as a legal tender in 2021. How’s that working out for them? Not that well.
As for whether it’s a bubble that’s going to pop or a tree that will grow to the sky, I’ll leave that question to someone more prescient than I am.